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Foreclosure crisis likely won't repeat itself

CoreLogic recently did a retrospective study of the foreclosure crisis to mark the 10-year anniversary of the start of the last downturn in the housing market. CoreLogic Chief Economist Frank Nothaft spoke with Scotsman Guide News about about why such a severe downturn is unlikely to happen again.

When the housing market began to sour 10 years ago, did you think
it would take this long to recover?

When it began, I don’t think anybody had any idea how severe
it was going to be. If we turn back the clock 10 years, home prices were
either hitting their peak in local markets or had just begun to turn downward,
and I don’t think anyone would have foreseen the extent and the breath of the
decline in home prices, nor the severity of the Great Recession. Those
two forces, coupled together, combined to translate into 8 million
foreclosures over that 10-year period.

And where are we today? Are we back to a normal market?

I would not say completely normal, but almost. In
2016, it was the least number of foreclosures since 2006. So, big improvement,
big progress. When we look at the foreclosure inventory, that is the lowest we
have seen in about 10 years. The loans in foreclosure are, for the most part,
a legacy book of loans originated prior to the Great Recession. We have worked
through most of that legacy book, but not all of it yet. Loans originated from
2009 to current are loans that have exceptionally low delinquency, exceptionally
low default rates, compared to loans originated prior to 2009.

Foreclosure trends are falling nationwide, but are any areas
seeing an uptick in foreclosures?

Most parts of the country are showing declines in
foreclosure rates, declines in serious delinquency rates, but it is not uniform
across the country. Those markets that have a high proportion of the employment
base in energy production, in oil production, tend to be the
markets experiencing an increase in default rates over the last couple of
years. That is partly because of the big drop in energy prices and oil prices
in particular, global oil prices. One other change that we have noticed in our
most recent data for December and January is a little uptick in the FHA [Federal Housing Administration] default
rates. FHA default rates had been coming down over the last several years just
like we have seen with conventional loans. So that is something to watch going
forward.

Do you think that what happened 10 years ago could happen
again, or has the market changed so much that a catastrophic downturn is not
possible today?

No, I don’t see that happening anytime in the near term with
the types of products being originated. Can it ever happen? Well, sure, it
could happen. The experience that we went through in the last decade was not
that dissimilar from what happened in the United States in the 1930s during the
Great Depression. During the Great Depression, the unemployment rate hit 25
percent at the trough. We were nowhere near 25 percent in the unemployment
rate, but we did get to a very high unemployment rate during the Great
Recession for an extended period. You can never rule it out, but I believe with
the safeguards that have been put in place in terms of lending practices,
appraisal practices, financial stability, regulation, oversight of large
financial institutions, it is almost zero probability that anything that we
went through would happen in the near term.

Is there anything about the market that is worrisome?

As we move into a market that will be dominated by purchase
lending, lenders and mortgage investors need to be more cautious about fraud
risk. This is not to say you can’t have fraud in refinance transactions, it is
just far less common. When it comes to a home purchase, you have different
actors, different players. When you have a lot of different, independent
characters involved, there is the potential for a bad apple to come into play
that leads to a fraudulent transaction. We do expect that purchase transactions
will rise this year again in 2017. That means that lenders and mortgage
originations have to be more alert to watch out for fraud risk in the
marketplace. That is something I would keep an eye out in the market in 2017
and beyond.

Do you have any final thoughts on this 10-year ride in the
market?

What a long strange trip it has been. We have made it
through it, and it is good that it is behind the industry. The lessons that
have learned have been very important in terms of the importance of good
quality underwriting, good quality appraisals. With the new oversight and
regulations that have been put in place, it has helped to reduce the risk in
the housing-finance system significantly.